TMI Blog1996 (8) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... the income from the assets received on partition had been considered in computing the total income of the assessee, the Tribunal was right in holding that a part of the interest in respect of amounts due to unsecured creditors should not be allowed either by way of any overriding title or otherwise ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that such interest as was disallowed was not admissible deduction under section 12(2) of the Indian Income-tax Act, 1922 ? (3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the said interest should not be taken into account while determining the real income of the appellant ? " The relevant years of assessment were 1951-52, 1952-53 and 1954-55 to 1961-62. The High Court answered questions Nos. 1 and 2 in favour of the assessee and against the Revenue. The facts of the case as recorded by the Tribunal in its appellate order, dated November 22, 1972, were as follows. Sir Chinubhai Madhavlal had filed a suit in the High Court of Bombay in 1948 against his three sons, Udayan Chinubhai, Kirtidev Chinubhai, Achyut Chinubhai, and his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u undivided family had no existence. Tanumati and her three sons did not succeed to the properties of the Hindu undivided family but were allotted their respective shares of properties which were held by them as tenants-in-common. In view of the decision of this court, assessments were made in the case of Lady Tanumati and her three sons in the status of individuals and not as a Hindu undivided family. The claim of the assessees in the individual assessments was that the assessees had to pay interest on various liabilities taken over by them and these interest payments should be considered as diversion of their income from properties by an overriding title. It may be mentioned that the income of the assessees consisted of income from immovable property, business income and income from other sources. Some of the debts were secured against immovable properties. The Income-tax Officer in working out the property income, allowed these interest payments as admissible deductions. However, he was of the view that the other interests could not be allowed as deductions. The assessee also made a claim that interest payments should be allowed as deduction under section 12(2) of the Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noted that the partition had not brought about any change in the nature of ownership of the properties. Tanumati and her sons had interest in the properties even before the partition as members of the joint family. The karta as well as the coparceners of the Hindu undivided family were liable for the debts of the Hindu undivided family. He also rejected the contention that there had been diversion of income by overriding title. Merely because liabilities and assets were inherited from an ancestor or received on partition, the interest paid on liabilities could not qualify for deduction against income from assets under the head "Other sources". The Tribunal on further appeal rejected the contention of the assessee that there had been diversion of income by overriding title and also that the real income of the assessee must be determined after deduction of all the interest payments. The Tribunal held that the facts of the case did not show that the debts were automatically dovetailed with the Hindu undivided family properties which the sons or the wife had received on partition. It was not as if the sons acquired the properties subject to overriding claims in respect of the family ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 94 of the Indian Trusts Act, 1882. The High Court was also of the view that certain properties which formed part of a Baronetcy Trust, were partitioned between the father on the one hand and the mother and the sons on the other. The properties were trust properties. A consent decree was passed and an arbitrator was appointed. Under the terms of the consent decree and the arbitrator's award, some of the debts of the family were allotted to the mother and the sons. According to the High Court under the doctrine of pious obligation, the assessees were liable to pay the debts of the father. Apart from this liability under the award of the arbitrator, the assessees undertook the liability to discharge the debts. The provision under the Hindu law, the Indian Trusts Act, the terms of the consent decree and the arbitrator's award created an overriding title in favour of the creditors to have their liabilities paid from the assets which came into the hands of the assessee. Therefore, the interest paid to unsecured creditors out of the assets received by the assessees on the partial partition was diverted by overriding title and did not form part of the real income of the assessees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... due thereof (as the case may be), to the extent necessary to satisfy their just demands. Illustrations (a) A, an executor, distributes the assets of his testator B to the legatees without having paid the whole of B's debts. The legatees hold for the benefit of B's creditors, to the extent necessary to satisfy their just demands, the assets so distributed . . . . . ." It has not been shown that after partition, the assessee did not have the entire beneficial interest in the properties allotted to him. It cannot be said that the creditors had any interest in these properties in any manner. If a man takes a loan simpliciter, the creditor does not acquire any interest in the properties of the debtor. In this case, all that has happened is that as a result of the partition, the assessees had been allotted certain properties of the joint family. Some of the liabilities of the joint family have also been allotted to the assessee. The interest payable in respect of these debts and liabilities will have to be paid by the assessees. It may be paid out of the income of the assets received on partition or otherwise. There is no obligation to pay the debts out of any particular asset. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee on partition, the income had to be reduced by the amount of interest the assessee had to pay to the creditors. This argument runs against the basic principles of the income-tax law. The income of an assessee has to be computed in the manner laid down under the Income-tax Act. The Act of 1922 had made elaborate provisions for classification of income under various heads and the deductions permissible under each head. The assessee's claim, in effect, is what is not permissible in law as deduction under any of the heads will have to be allowed as a deduction on the principle of real income of the assessee. If a man incurs debts in his business and has to pay interest thereon, then such interest will be deductible. But if a person with salary income only incurs a debt, then interest on such debt cannot be allowed as deduction in the computation of salary income on any principle of real income. Even if a man has business income, then unless it can be established that the loan was obtained for business purposes, the question of deduction of interest paid on the loan from the business income cannot arise. Whether the assessee is a company or an individual or an Hindu un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he creditor." Lord Scrutton concluded by saying, "It appears to me, if it is not the debtor's income, it must be the creditor's income, and I am not sufficiently topsy-turvy to think of a creditor discharging debts due to him out of his own income." In the case of Paterson [1924] 9 TC 163 (CA), a charge was created on the property from the income of which the debt was paid. In the case before us, there is not even a charge. It is a simple case where the assessee has paid interests on loans in the relevant years of assessment. The interests may have been paid out of income derived from the property allotted to the assessee on partition of the joint family property. But what was received by the assessee out of the assets was his own income. The assessee will have to bear the burden of the liabilities that have been allotted to him. The interests on the loans will have to be paid to the creditors. But such payment will only be application of income. The income from the assets were received by the assessee. Payment to the creditors may have been made out of that income. The application of the income will not in any way alter the character of the income received by the assessee. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at he received for her was not his income. Lord Macmillan observed that : "it is not a case of the application by the appellant of part of his income in a particular way, it is rather the allocation of a sum out of his revenue before it becomes income in his hands ". In that case, the step-mother had filed a suit for maintenance. Chief Justice Rankin of the Calcutta High Court had rejected the argument that the assessee's liability to his step-mother was of the same kind as his liability to provide for his wives and daughter and stated that the position is the same as if the appellant "had received his various properties, securities and businesses under a bequest from his father upon the terms that these assets were charged with an annuity for the maintenance of the widow". Lord Macmillan observed that this was the correct approach to the question raised before it and emphasised that the decree of the court by charging the appellant's whole resources with a specific payment to the step-mother had diverted his income from him. The amounts payable to the step-mother under the decree could not be treated as the income of the assessee. But this is not a case of a bequest at all. No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation, income was diverted before it reached the assessee, it was deductible ; but where the income was required to be applied to discharge an obligation after such income reached the assessee, the same consequences in law did not follow. It was the first kind of payment which could truly be excused and not the second. The second payment was merely an obligation to pay another a portion of one's own income which had been received and was since applied. The case before us is a case where the assessee is obliged to pay all the debts which have been allotted to him. But as was pointed out by Hidayatullah J., the obligation to apply the income to discharge a debt will not amount to diversion of the income at source even before the amounts became the assessee's income. The principle laid down in the case of Sitaldas Tirathdas [1961] 41 ITR 367 (SC) was explained by this court in Moti Lal Chhadami Lal Jain v. CIT [1991] 190 ITR 1, where it was held : " Where the obligat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or anybody else whom he is obliged to maintain, the expenditure incurred in such cases will be application of the assessee's income and not diversion of the income at source. If he does not pay what he should have paid and is compelled by a court order to pay, it will still not be a case of diversion of income at source. Even if a charge is created on the properties of the assessee for enforcing payment, the position in law will not change. This was made clear in the case of IRC v. Paterson [1924] 9 TC 163 (CA). It must also be borne in mind that in Raja Bejoy Singh Dudhuria's case [1933] 1 ITR 135 (PC), the charge on the properties inherited by the Raja was created to secure payment of maintenance of his step-mother. Lord Macmillan quoted with approval the observation of Rankin C. J. : " The learned Chief Justice in his judgment, which was concurred in by his colleagues, Ghose and Buckland, JJ., deals with the case on the footing that, by the decree of the court, the appellant's step-mother had a charge not only on his zamindary property from which his agricultural income was derived, but also on all his other sources of income included in the assessment. He rejects the suggesti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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